Monday, September 30, 2013

Video Makes "Pricing by Value" Difficult

Video entertainment is going to pose a huge challenge for ISPs using every type of business model, from simple “best effort” access to providers of managed services. Sheer volume is the problem for providers of best effort access; but revenue per bit is the issue for some managed service providers.

The revenue per bit problem is easy to describe. Assume an ISP sells a triple-play package for a $130 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $43 for each component).

Ignore other cost of service elements, such as marketing and content acquisition fees. In term of network usage, that would make sense if each constituent service “consumed” roughly equivalent amounts of capacity, or if retail charging was based relatively directly on consumed bandwidth, and not “perceived value.”

Of course, retail pricing is to some extent based on perceived value. Any service provider would have trouble pricing a service wildly out of line with prevailing customer expectations. A voice service costing about $40 to $50 a month is viewed as a market level.

Internet access priced roughly in the same rangle is viewed as a reasonable, market-set level, as is video service of roughly $70 a month. In other words, people have expectations about what a certain product or service “should” cost, as Apple iTunes has created an expectation that the “right price” for one song is 99 cents.

Use of network resources is unbalanced, though. Voice requires use of almost no bandwidth, while video consumers nearly two orders of magnitude more capacity, for each minute of use. Internet traffic is in between, with some apps consuming little capacity (email), some apps consuming a moderate amount of capacity (web browsing) while others are heavy capacity consumers (video).

So video poses the big value-price issues for an ISP, exacerbated by the revenue and business model implications of third party, over the top video (Netflix, YouTube) and managed video (cable, satellite and telco TV).

The revenue per bit from a customer’s use of Netflix or YouTube is very low. The revenue from a managed video subscription service are arguably reasonable, so long as the delivery network is using multicast technology.

If any future shift to primary delivery of subscription video services using a standard Internet connection, the revenue issues will be compounded, since consumption of video bits will dominate total use of the network. And that will make “pricing by value,” or “pricing by consumption,” more difficult.

The reason is simply that consumers will "value" an hour or two hours of entertainment at levels that make "pricing by value" or "pricing by consumption" a difficult exercise.

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